w CME Gr up ice* May 21, 2 18 VIA ELEC RONIC SUBMISSION Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency 4 7th Street SW, Suite 3E-218 Washington, DC 2 219 [email protected] Board of Governors of the Federal Reserve System 2 th Street and Constitution Avenue NW Washington, DC 2 551 [email protected] Re: Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and their Subsidiary Insured Depository Institutions Dear Sir/Madam: CME Group Inc. ("CME Group")1 is the parent of the Chicago Mercantile Exchange Inc. ("CME"). CME is registered with the Commodity Futures Trading Commission ("CFTC", as a derivatives clearing organization ("DCO") and is one of the largest central counterparty ("CCP") clearing services in the world. CME's clearing house division ("CME Clearing") offers clearing and settlement services for exchange-traded futures and options on futures contracts, as well as over-the-counter ("OTC") derivatives transactions, including interest rate swaps ("IRS"). On July 18, 2 12, the Financial Stability Oversight Council designated CME as a systemically important financial market utility ("designated FMU") under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Intercontinental Exchange, Inc. ("ICE") owns and operates seven clearing houses that serve global markets across North America, Europe and Asia. ICE has a successful history of clearing exchange traded and OTC derivatives across a spectrum of asset classes including energy, agriculture and financial products. ICE Clear Credit, a CDS clearing house, is designated as a FMU under Title VIII of the Dodd- Frank Act. 1 CME Group is the parent company for four designated contract markets: the Board of Trade of the City of Chicago, Inc. ("CBOT"), the New York Mercantile Exchange, Inc. ("NYMEX"), the Commodity Exchange, Inc. ("COMEX") and the Chicago Mercantile Exchange inc. ("CME"). CME is also registered as a derivatives clearing organization under the Commodity Exchange Act ("CEA"). CME is also designated as a systemically important financial market utility under Title VIII of the Dodd-Frank Act. a»CME Gr up Lie CME and ICE appreciate the opportunity to comment on the Board of Governors of the Federal Reserve System ("Board") and the Office of Comptroller of the Currency ("OCC") joint proposed rulemaking ("the proposed rules") that would modify the enhanced supplementary leverage ratio ("eSLR") standards for U.S. bank holding companies which are treated as global systemically important banks ("G-SIBs"). CME and ICE closely follow regulatory reforms that have the potential to impact the centrally cleared ecosystem and incentives to clear more generally. CME and ICE support the goals of the eSLR framework to restrict the build-up of leverage in the banking sector while ensuring the largest and most interconnected banking organizations have adequate capital to maintain financial stability throughout the economic cycle. It is our understanding that the recalibration of the eSLR leverage buffer to 5 percent of a firm's G-SIB capital surcharge intends to address the systemic risk created where the eSLR serves as a binding constraint and creates incentives for banks to reduce their participation in lower risk, lower return business activities and instead allocate capital to higher risk business activities. We believe the proposed rules are a step in the right direction of reducing systemic risk by reducing the disincentives for central clearing, and other similarly low risk activities. We note that the G-SIB surcharge methodology that is proposed does in fact account for some of the differences in market structure between cleared and uncleared markets, and provides some central clearing incentives. However, the proposed rules do not address the fundamental problem with the eSLR in relation to centrally cleared derivatives markets, the decision to ignore centrally cleared derivatives market structure by failing to provide offsets for segregated, client initial margin. CME and ICE support the concept of leverage capital limits which are appropriately tailored to foster financial stability. Leverage ratio exposures must accurately reflect the true economic risk. In the case of centrally cleared derivatives, the Futures Commission Merchant (FCM) clearing model in the U.S. must be understood and accounted for in eSLR design. FCMs act as agents for their clients, guaranteeing the performance of the clients to the CCP, assuming any payment obligation that would arise should a client default. To mitigate the risk associated with potential future exposures of these client cleared derivative transactions, initial margin is pledged by the client to the FCM clearing member and then placed in a segregated account whereby client money is held separate from the FCM's own money. The vast majority of this customer initial margin is then passed on to the CCP or clearinghouse where it remains outside ownership and becomes outside the control of the FCM clearing member. By law and regulation, these initial margin resources may only be used to offset the client exposure guaranteed by the FCM. Failing to provide recognition of this segregated client initial margin against client exposures therefore increases rather than decreases systemic risk by incentivizing banks away from lower risk businesses such as client central clearing and into other higher risk businesses. Below are additional remarks to the specific question as laid out in the Board and OCC proposal. Question 3. What, if any, beneficial or negative consequences for market participants, consumers, and financial stability are likely to result from the proposed calibration? Please provide examples and data where feasible. The reduced ability for G-SIB and bank affiliated CCP clearing members to provide client clearing services due to the current eSLR calibration has been widely publicized within the derivatives industry. Many FCMs have left the business over the past few years and a smaller FCM clearing member community adversely impacts the financial markets by concentrating risk while reducing the availability of clearing services to end-users. End-users depend on clearing services to mitigate their business risks and a lack of 0?) CM E Gr up ice* access to these services results in the increased cost of goods for consumers. The proposed recalibration of the leverage buffer to a floating, risk-based backstop requirement has the potential to create incentives for firms to provide client clearing services depending on how the banks chose to reallocate the capital relieved under the proposed rulemaking. However, a greater incentive would be achieved by providing offsets for segregated client initial margin which would directly incentivize client clearing services which are essential to financial stability and the wider economy, as evidenced during the financial crisis. Client clearing allows a wider group of market participants to hedge their business risk while increasing overall financial stability by applying risk mitigation benefits of central clearing to a larger portion of the financial system. Unfortunately, if the proposal is adopted in its current form the goal of the Group of 2 nations ("G-2 ") to incentivize central clearing will not be fully realized because the availability of client clearing will be reduced. This is due to the fact that the proposed rules do not consider the market structure of central clearing, specifically the nature of appropriately segregated customer initial margin as an offset against client derivative exposures. Under the U.S. regulatory framework, FCM clearing members are required to segregate the positions and collateral of their customers from that of their own proprietary positions and collateral.2 The sole purpose of client collateral is to offset the potential future exposures arising from a given customer's derivatives positions at a CCP, with the vast majority of client collateral required to be passed through from the clearing member to the CCP. To date, these protections have been recognized by policymakers in Europe but ignored by banking regulators elsewhere. The continued failure of the eSLR standards to recognize the role and use of segregated customer initial margin for centrally cleared derivatives may also increase systemic risk by lowering the probability of successful porting of solvent customers of a defaulting clearing member of a CCP. For background, in the event of a clearing member default, in order to maintain market stability and preserve risk management capabilities for clients by minimizing portfolio liquidation, a CCP will often look to port the solvent customers of the defaulting clearing member. The consequences of the SLR and eSLR are such that during a period of financial stress in which clients may need to be ported to solvent clearing members, a bank-affiliated clearing member cannot consider the fully segregated customer initial margin they would receive by taking on these solvent customers as a means to offset the increased capital required to meet the increased SLR and eSLR requirement. The lack of recognition for segregated customer initial margin offsets under the current standards increases liquidation risk for customer portfolios in the event of a clearing member default because of the risk non-defaulting clearing members will be unable to accept